At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
Like the teens experiencing their first high-school crush, there's nothing cute as bankers in love -- the latest instance of which was published in the "Commitments" section of yesterday's edition of Briefing.com. There we learn that the dashing European prince of investment banking, Deutsche Securities, has proposed to American girl-next-door JPMorgan Chase (NYSE: JPM ) , initiating coverage at "buy."
Why should we care? Why did ABC revive The Bachelorette? I guess Americans just love a love story. And Deutsche has proven itself adept at separating the gentlemen from the cads in Commercial Banking:
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Stock
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Deutsche Says:
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CAPS says:
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Deutsche's Picks Beating S&P By:
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Regions Financial (NYSE: RF )
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Outperform
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**
|
7 points
|
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KeyCorp
|
Underperform
|
**
|
50 points
|
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Fifth Third Bancorp (Nasdaq: FITB )
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Underperform
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**
|
42 points
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Sadly, it's been less successful finding eligible bankers in the Capital Markets:
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Stock
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Deutsche Says:
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CAPS says:
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Deutsche's Picks Lagging S&P By:
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Morgan Stanley
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Outperform
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**
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19 points
|
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UBS
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Outperform
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**
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28 points
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E*Trade Financial (Nasdaq: ETFC )
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Outperform
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****
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53 points
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What's got Deutsche all hot and bothered about JP? Deutsche jots down a few notes in the "pros" column:
- "Credit pressure should be less than at most banks given less commercial real estate exposure and robust loan loss reserve levels."
- JP also boasts a "stronger capital position" than many of its rivals.
- Its "diverse business mix and large investments in several key businesses" should provide strong revenues.
- And thanks to the size of these revenues, JP will benefit from "positive operating leverage."
All of which has Deutsche thinking that even if everyone else loses money in the second half of this year and into 2010, JP Morgan should remain profitable.
"Size matters"
Seems to me, that's basically what Deutsche Bank's analysis boils down to. JP Morgan is one of the four Obama-approved bankers. When everyone else was being allowed to die off or be acquired, JP was doing the acquiring -- and surviving.
As a result, it may not now be the biggest banker in the business (Bank of America (NYSE: BAC ) edges it out on annual revenues). But JP Morgan is nonetheless a survivor, and has shown more resilience than its peers during the crisis. It's also arguably the cheapest of the four remaining U.S. megabanks, selling for 15 times forward earnings versus Wells Fargo's (NYSE: WFC ) 17x multiple, BofA's 19x, and Citigroup's (NYSE: C ) [gulp!] 46 forward P/E.
It's a reasonable enough argument, as far as it goes. But just the mere fact that JP Morgan is big, and more profitable than some banks that are smaller, justify buying the stock? Personally, I have my doubts. For one thing, I'm always skeptical of forward earnings estimates. (Call me crazy, but I prefer to base my valuations on facts as opposed to guesses.) For another, even if Wall Street's projections regarding JP Morgan's profits prove correct, then 12% long-term profits growth may struggle to justify JP's 14 forward P/E.
And for a third and final reason to not buy JP Morgan: Deutsche's schizophrenic record on banks. While a fine picker of retail bankers, Deutsche has a pretty miserable record on banks doing anything much trickier than taking in deposits and extending loans. And seeing as Deutsche makes JP's "diverse business mix and large investments in several key businesses" such a key point in its buy rating... I have my doubts.
Foolish takeaway
Put it all together -- JP's high stock price, its not-high-enough growth rate, and Deutsche's own dubious record on banking stocks -- and my advice is to let this particular opportunity pass you by. Stay away from JP Morgan.
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